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Why I Walked Away From a $12M Acquisition Offer 18 Months After Our Launch

236 pointsby nilmonibasakover 10 years ago

21 comments

mattzitoover 10 years ago
The upside potential is exactly why they offered 14x revenue - they had to sweeten the pot and make sure that they incentivize you to move <i>now</i> as opposed to later. They are willing to pay a little more now in exchange for insuring that they don&#x27;t miss out, or miss a huge inflection point.<p>However, bear in mind that as time goes on, and there&#x27;s more data about monthly run rate, that multiple will likely go down.<p>First, as time goes on, it will become increasingly less likely that you will &quot;pop&quot;, or have a huge hockey stick of growth. Part of the multiple is designed to get you out of the game before you hit that inflection point.<p>Second, many companies fall down once they try to scale their business. It requires a different set of skills, often different employees, and makes it a lot more likely that you&#x27;ll miss on execution. Once you have a few quarters in a row of ~2% growth instead of 5%, your valuation will drop dramatically.<p>Third, the market moves around you. Even if you&#x27;re continuing to grow, what your competitors do can influence your valuation, to your betterment or detriment.<p>I&#x27;m not saying that the author made the wrong decision, only that it&#x27;s always easier to say, &quot;Well, if we keep growing, and wait another year, we can get acquired for 2X more!&quot;. Heck, a year from now, that acquirer themselves might not exist anymore.<p>I think that <i>if</i> you expect you&#x27;ll want to exit the business at some point in the next few years, <i>if</i> you are fortunate enough to get a more than fair offer where all of your employees and investors would see it as a win financially, you need a really compelling argument <i>not</i> to take it.
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mikekijover 10 years ago
Swinging for the fences is great, but so is getting on base.<p>Twelve months ago I accepted 7-figure acquisition offer for my company. Members of our team thought the offer was too low. It was a struggle for me to get everyone on board for the deal.<p>In the past twelve months, the market conditions and competitive landscape have changed dramatically. Had we not accepted the acquisition offer, we&#x27;d be out of business, and we would have lost all of our investors&#x27; money. This would have had little to do with our execution, and much to do with exogenous factors out of our control.<p>Just one data point though.
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DanBlakeover 10 years ago
I respect this post, but the most important thing in my mind is not mentioned:<p>&quot;past performance is not indicative of future performance&quot;<p>You need to give credence to the fact that you could have competitors offer your exact product for much less than you do. That a newer, better product could offer more for less. Or also that your product just becomes less good over time and your customers leave. Ecosystems change as does business.<p>You need to account for the fact that you could be left with nothing also. This isnt to say not taking the money was the right&#x2F;wrong thing. Thats your call alone to make.
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timjahnover 10 years ago
The real answer is a third of the way through the post: &quot;First-time founders care most about their exit. Every time after that, you focus on legacy.&quot;<p>The author already had a successful exit, so they have their money. Now they want to make a difference.
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beck5over 10 years ago
I think a key difference here is Groove is actually a real company with real revenues which are growing. This is not true for many similar sized acquisitions you see. Good on Groove!
enjoover 10 years ago
Reminds me of a story I heard about Photobucket. The founder there apparently had a $1M cash offer early on to sell out. At that point his credit cards were maxed and was really struggling to keep the thing afloat.<p>He chose to pass and went on to sell the company for $300M to Newscorp. Of which he owned a significant portion.
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chdirover 10 years ago
&gt; We had a handful of meetings between with their business development team and executive teams, and their engineering team did a thorough technology review of Groove.<p>I&#x27;m curious, why would you let them do a <i>thorough</i> technology review of your startup in the first place? (Edit: Because it can be dangerous)
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josefrescoover 10 years ago
Can&#x27;t wait for the follow up, a year from now about how things went after this acquisition attempt and post. I&#x27;m not insinuating that they&#x27;ll fail, just that the follow up is more important than this declaration.
ar7hurover 10 years ago
I appreciate you sharing your experience, this is something we founders are not enough prepared to go through.<p>Two comments IMHO:<p>- Would you have said yes and looked into the details of their offer, you would have realized that the $12M are not upfront. Through retention packages and revesting, most of the price is typically paid over 3 or 4 years. So the offer was probably less attractive than it initially looks.<p>- $12M is <i>never</i> a good outcome for investors (at least big angels and VCs). They make their returns only on big exits.
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mbillie1over 10 years ago
With respect to the 5 questions at the end, it seems arguably that the author&#x27;s own evidence demonstrates the incorrectness of the decision for everyone except current customers. Interesting path to take, and nice to read the thought process. How did the rest of the Groove team react?
softdev12over 10 years ago
&quot;Our monthly revenue was around $70K at the time, making $11.8M a 14x multiple on our annual revenue. Even in SaaS, that’s on the very high end of the norm, and a multiple generally reserved for highly profitable companies (or ones with massive user bases).&quot;<p>Congratulations to the company for the growth after only a handful of months. Very impressive.<p>Using multiples always seems a bit odd for me in super high growth early stage companies. If a product really takes off the early small numbers can really skew things in comparison to later big ones. It&#x27;s like seeing a 10,000 percent growth rate in the first month on a tiny base.
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not_that_noobover 10 years ago
It takes a lot of guts to do this. Only time will tell if this was a genius move or... I am rooting for genius. Good on you for swinging for the fences.<p>Also, smart to talk about this publicly. Of course, it&#x27;s good reading. But also many people like buying from those who care about the product they build than from a faceless bigcorp. You can&#x27;t buy that sort of credibility.
DubiousPusherover 10 years ago
I don&#x27;t understand why so many here are questioning this move. You can shoot down his logic about the future upside but clearly it wasn&#x27;t about the money anyway. Call me crazy but I find it encouraging that this guys is measuring the success of his business not just by how much it makes but also by whether it produces a good product that people actually want to use.
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egregiouscoderover 10 years ago
Congratulations to you! I think it&#x27;s good to iterate that you said you love what you&#x27;re doing. That&#x27;s what matters most. When I was a kid and someone offered to by my paper made ninja stars, for $5 (it was a lot of money as a kid and still is) I couldn&#x27;t sell it because I loved it! even though the materials probably added up to couple of cents.
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GreenPlasticover 10 years ago
Curious what your team thought was a good exit and what your definition of win handsomely is. For me, I&#x27;m at a startup where I gave up 75k-100k in salary for the first 2 years. Owning 1.5% of the company, &lt;20M exits only make sense the first 6-8 months. At 2 years, I would have done much better elsewhere.
debacleover 10 years ago
I wonder how many first-time founders would have made the same decision. My guess is very few.
yuhongover 10 years ago
&quot;Products that founders swore they built to be “simple” got bloated, overdeveloped and lost sight of their vision.&quot;<p>I wonder why.
uptownover 10 years ago
I&#x27;m guessing Salesforce. Anyone know the bidder?
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ainiriandover 10 years ago
Congratulations for the good job GrooveHQ.
mkazizover 10 years ago
Did the headline change from a normal one to a clickbait?
codingdaveover 10 years ago
I thought Groove was Ray Ozzie&#x27;s old company that he formed before Microsoft acquired it. I had no idea there was a new startup re-using the name.<p>EDIT: The original title said &quot;Why Groove walked away...&quot;.